Banks face liquidity crunch

Banks face liquidity crunch

Some financial institutions have been facing liquidity crunch over the past few months. They have claimed that they cannot meet the demand of lending in the market.

Liquidity crunch is a state when cash resources are in short supply and demand is high.

The financial sector performance review report, March 2019 of Royal Monetary of Bhutan (RMA) also states that the liquidity positions in the financial sectors has been decreasing.

The report states that as of March 2018 the liquidity stands at Nu 15.75bn, Nu 10.49bn as of September 2018, Nu 5.16bn as of December 2018 and Nu 3.19bn as of March this year.

The report states that as of March 2019, the financial sector has maintained Statutory Liquidity Ratio (SLR) at 20.97% which has decreased by 8.95% as compared to March 2018. This drop in SLR was primarily due to the increase in total liabilities by Nu 4.74bn, which mainly consists of deposits. SLR position of the banking sector stood at 22.35%. When compared to March 2018, SLR position of the banks has declined by 10.11%.

The cash reserves ration that the banks have to maintain with RMA is 10% of the deposits and statutory liquidity ratio (SLR) should be maintain 20%.

An official from the Bank of Bhutan (BoB) said that the bank is facing liquidity crunch due to liquidity absorption by the RMA for government corporate accounts and there is decrease in the deposits by the customers.

The bank official also said that if the banks cannot meet financing need of the customers, it is going to constrain the financial sector growth and impact the economy growth and Gross Domestic Product (GDP).

“RMA and government must intervene to strengthen prudential oversight to potentially re-calibrate the role of the government in the financial sector stability. Introduce the monetary policy by RMA as soon as possible to manage Asset-liability, liquidity stability and funding gap,” he said.

He also mentioned that since banks are facing a liquidity crunch to prioritize lending, currently the bank is controlling lending towards concentrated sectors.

“In the past few years, the bank was having excess liquidity. We are visiting corporate offices and asking them and encouraging them to keep fixed deposits with partial withdrawal facilities,” he said.

The bank official said that with the lending rate decreasing and deposits rate increasing expenses to the banks are increasing. “The lending rate and deposit rate should change simultaneously.”

In an earlier interview with former BNB CEO Kipchu Tshering, he had said that challenges in the bank are a never-ending story. Currently, the challenge in the financial sector is liquidity crunch.

“There is shortage of funds and there is much demand for loans and investments but we don’t have so much money to meet every kind of demand,” said the former BNB CEO.

He also said that there is no immediate solution for the liquidity crunch. “This crunch may be short term or may be long term partly because government has not made much investment for the last one and half years so the flow of money in the banking sector is very little. The crunch may improve in the future but it is not certain. If the government projects and investment comes through probably liquidity will improve in the financial sectors.”

Other than this there is strong competition among the banks therefore the deposit interest rates are increasing and the lending interest rates are decreasing so this has an  effect on the banks

The CEO of Druk PNB bank limited, DK Gupta, said that they have been facing a liquidity crunch over the past six months.

“The savings are not increasing over the years,” said the CEO adding that the reasons for liquidity crunch in the bank could be there is no industry and investments forthcoming.

He said that though liquidity crunch is short-term, the banks cannot meet the demand of lending in the market.

He mentioned that it can be addressed only if there is growth of industry and business in the market.

The paid-up capital of Druk PNB is Nu 700mn. So far the banks have disbursed Nu 9,547mn of loan and total deposit stands at Nu 13,000mn so far.

The CEO of Bhutan Development Bank (BDB) Phub Dorji said that the cause of the liquidity crunch is short-term deposits versus long-term lending. He said that it is up to the banks how they try to mitigate this problem. Banks have do this through the increasing the deposit interest rates.

“We also resort to asking the corporations to deposit money with banks giving higher interest rates,” said the CEO.

However, the CEO mentions that BDB does not face a severe liquidity crunch because the credit growth target is very small.  

Meanwhile, BNB and T-Bank CEOs said that they are not facing liquidity crunch so far.

Dechen Dolkar from Thimphu